In this episode, David and Ryan why the oil market seems overly jittery now that it appears the market is back in balance after three years of chronic over-supply. They also discuss how super tankers co-loaded with crude from both the U.S. and Mexico have helped open up Asian markets to U.S. producers, why solar really isn’t cheaper than coal despite all the hype in the media, and celebrate the fact that Shell has now restored its full cash dividend thanks to its strengthening bottom line.
Energy Week, Episode 4: Why the majors aren’t worried about “Peak Oil” but the markets are worried about events in Saudi Arabia.
Show Notes: In this episode, David Blackmon and Ryan Ray discussed how the ongoing upheaval in Saudi Arabia is impacting oil markets, and the impacts it all could have on the planned IPO for Saudi Aramco. Next, they talked about the reasons why the various “Peak Oil” theories and narratives are wrong, and why the big oil companies aren’t really worried about them. Finally, David talked about the reasons why he thinks the U.S. industry just might not mess up the current positive oil price situation in 2018.
Links to articles referenced in Episode 4 of Energy Week:
If you read the Dallas Morning News for information about the oil and gas industry, you’d be best advised to do more than just scan the headlines. Here are two examples of headlines that just don’t really match the content of the articles:
Trump Won’t Declare Dallas Firm’s Dakota Access Pipeline A Major Disaster – Well, no, that’s not at all an accurate description. The state of North Dakota’s governor – Doug Burgum – did not ask President Trump to declare the Dakota Access Pipeline to be a “major disaster”.
Governor Burgum did ask the President to declare the site of the months-long protest/riot action against the Dakota Access Pipeline to be a “major disaster” in an effort to seek federal help in footing the $38 million bill for policing the often-violent protesters and cleaning up the epic mess they left behind when they finally cleared their illegal site. Given that it was the federal government, under Barack Obama, that allowed these rioters to illegally occupy the site for half a year, it would seem that the Governor had a valid complaint. President Trump disagreed, which is his right. Either way, it would have been nice for the headline writer to accurately portray the content of the article.
So here we are, right where I expected things to be last December, when I wrote my projections for 2017: U.S. oil and gas drillers have activated almost 300 additional drilling rigs during the year’s first six months, U.S. oil production has soared as a result, offsetting much of the cuts implemented by OPEC and Russia, and the result is that the U.S. industry has drilled itself right back into a lower price situation , with the price for WTI hovering in the $44-$45/bbl range.
This very predictable response by the U.S. industry to the higher oil prices at the end of 2016 has effectively slowed the ability of the OPEC/Russia alliance to close the global supply glut, causing commodity traders to lose confidence. Saudi Arabia is responding by significantly reducing its exports to the U.S., in the hopes of creating a few weeks of large storage draws, which they hope will restore investor confidence and cause the price to tick upwards. They may or may not be correct – we’ll just have to wait and see.
In the meantime, U.S. rig additions have begun slowing somewhat over the past few weeks – although the week of June 10 – June 16 became the 22nd straight week of rising rig counts – as the industry begins to scale back its drilling plans for the 2nd half of the year in response to the lower price. This again is no surprise to anyone who understands how the U.S. industry works, as I wrote in December:
- But prices may rebound the second half of the year – Of course, a lower oil price will lead many producers to reduce drilling budgets during their mid-year reviews, and rig counts will cease to rise, and possibly even fall off somewhat. With OPEC still at least making some effort to control production levels and global demand still steadily rising, a leveling-off of U.S. production should cause the market to rebound.